Announcements

GCR affirms African Banking Corporation (Moҫambique) S.A.’s rating of BB+(MZ); Outlook Stable.

Johannesburg, 30 June 2017 — Global Credit Ratings has affirmed the national scale ratings assigned to African Banking Corporation (Moҫambique) S.A. of BB+(MZ) and B(MZ) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until June 2018.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to African Banking Corporation (Moҫambique) S.A. (“BancABC Moҫambique”, “the bank”) based on the following key criteria:

Key financial and credit metrics of BancABC Moҫambique strengthened in FY16, with notable improvement in capitalisation, profitability and asset quality, which reflects the ‘Stable’ rating outlook (a revision from the ‘Negative’ rating outlook assigned in June 2016). For an upward rating movement, GCR would require a sustainable improvement in asset quality and profitability, as well as maintenance of solid capitalisation.

The current ratings are underpinned by demonstrated shareholder support. During FY16, the bank’s parent, ABC Holdings Limited, which is wholly-owned by Atlas Mara Limited, provided capital/funding support in the form of an equity injection of MZM750m (equivalent to c.USD10m), comprising share capital of MZM600m and MZM150m as long-term debt, which qualifies as Tier 2 capital. As a result, and supported by internal capital generation of 5.8%, the bank’s total risk-weighted capital adequacy ratio strengthened to 24.0% at FY16 (FY15: 10.4%), well above the regulatory minimum of 8%.

The bank’s gross non-performing loan (“NPL”) ratio improved to 9.2% at FY16 (FY15: 11.5%) due to write-offs, a reduced risk appetite and enhancements to the bank’s risk management framework. Provisions covered 93.5% of NPLs at FY16, up from 50.8% at FY15. Nevertheless, asset quality risks will likely remain elevated given challenging operating conditions. In addition, new IFRS 9 guidelines (an issue faced by financial institutions globally) also imply further pressure on provisioning.

The bank has experienced volatility in its earnings, costs and credit losses over the past five years. In FY16, the bank posted a profit after tax of MZM136.4m (FY15: a loss of MZM101.3m) driven by higher interest margins, net gains from foreign exchange trading of MZM557.8m, a decline in impairment costs, and an improvement in the cost/income ratio (from 86.1% to 76.5%).

Like many banks in Mozambique, BancABC Moҫambique remains dependent on market-sensitive wholesale funding, which results in high depositor concentrations and a very short maturity structure. Liquidity risks are largely ameliorated by the high coverage of short-term funding by liquid assets (53.6% at FY16), and access to intergroup funding.

The introduction of a new management team, a focus on retail and small and medium-sized enterprises for growth, and ongoing efforts to improve risk management practices were taken into consideration by GCR. However, continued success in its turnaround strategy will be challenged by increased economic, industry and regulatory risks.

A demonstrated track record of improving profitability and asset quality, while maintaining solid capitalisation, and increasing funding diversification and/or operational scale, could positively impact the ratings. Negative rating action could be triggered by deterioration in asset quality and significant capital adequacy erosion, weaker liquidity metrics, amid adverse macroeconomic developments and business conditions within the domestic market.

NATIONAL SCALE RATINGS HISTORY
Initial rating (December 2004)
Long-term: BBB-(MZ); Short-term: A3(MZ)
Outlook: Stable
 
Last rating (June 2016)
Long-term: BB+(MZ); Short-term: B(MZ)
Outlook: Negative
ANALYTICAL CONTACTS    
Primary Analyst    
Kurt Boere    
Credit Analyst    
(011)784-1771    
boere@globalratings.net    
     
Committee Chairperson    
Omega Collocott    
Sector Head: Financial Institution Ratings    
(011) 784-1771    
omegac@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

BancABC Moҫambique rating reports (2004-16)

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

African Banking Corporation (Moҫambique) S.A. participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to African Banking Corporation (Moҫambique) S.A. with no contestation of the rating.

The information received from African Banking Corporation (Moҫambique) S.A. and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2016 (and four years of comparative numbers)
  • Unaudited management accounts up to 30 April 2017
  • Budgeted financial statements for 2017
  • Latest internal and/or external audit report to management
  • A breakdown of facilities available and related counterparties
  • Corporate governance and enterprise risk framework
  • Industry comparative data

The ratings above were solicited by, or on behalf of, African Banking Corporation (Moҫambique) S.A. and therefore GCR has been compensated for the provision of the ratings.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR GLOSSARY

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Asset Quality Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.
Audit Report A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capital The sum of money that is invested to generate proceeds.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.
Corporate Governance Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
Credit Rating Agency An entity that provides credit rating services.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Equity Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
Impairment Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Liquid Assets Assets, generally of a short term, that can be converted into cash.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Long-Term Not current; ordinarily more than one year.
Long-Term Rating Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
Margin The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
National Scale Rating Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Outlook Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Securities Various instruments used in the capital market to raise funds.
Security An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short-Term Current; ordinarily less than one year.
Short-Term Rating An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Tier 2 Capital Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.

For a detailed glossary of terms please click here

GCR affirms African Banking Corporation (Moҫambique) S.A.’s rating of BB+(MZ); Outlook Stable.

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